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A Cold Gust for Wind Energy? Short Bets Rise On Vestas

This is a guest post by Karl Loomes, a market analyst at Astec Analytics, part of SunGard. The views expressed are those of the author.

In the next two months a 2.2 cents per kilowatt tax credit for producers of wind energy, originally set up in 1992 by George H.W. Bush, is due to expire, and so far the U.S. congress has shown no sign of extending the subsidy.

Naturally this is having an impact on the sector; just this week Vestas Wind Systems, the world’s largest wind turbine manufacturer, announced a €175 million net loss for the third quarter. Vestas also said they plan on cutting a further 3,000 jobs, having already made a series of lay-offs across the United States over the past few months. As if it were not facing enough hardship in the U.S., Vestas’ own Danish government has come out and said it will not offer financial support to the company to bridge it through times of financial stress. As the industry’s largest player, where it goes, so will the rest follow – at least in view of a sceptical public. So what bet is the market taking on Vestas?

Over the past 12 months the share price of Vestas has collapsed almost 60%, and despite a short-lived rally in September, remains under pressure as fears surrounding the green energy sector continue to weigh. But more than this perceived caution, securities lending data from SunGard’s Astec Analytics shows that there may also be significant pressure coming on the share price from those selling it short. This is a key difference: caution about a company leading to a lack of demand and a falling share price is one thing, but pressure being placed on a stock by those who think it is set to fall further can represent a real problem for its future.

The securities lending data shows us that over the past year the volume of Vestas’ stock being borrowed, a prerequisite for short selling, has been increasing steadily – now up around 40%. At the same time, and perhaps even more significantly, the rate traders have been willing to pay for the privilege of borrowing Vestas’ shares, again a show of demand for borrowing and a proxy for short selling began to increase from around June. Initially subject to some wide fluctuations, the cost of borrowing has seen a more steady increase over the past 8 weeks or so. Those wanting to sell the stock short are now paying around 10% annualised in order to do it.

Astec Analytics

So what does the future hold for Vestas? Well despite this seemingly downbeat outlook from the market, there is perhaps a little hope on the horizon. For one, although the US subsidy currently shows no real signs of being renewed, the prospects for this have increased substantially after the re-election of a pro-green President and a Democratic congress. In addition, although the Danish government warned it will in effect not bailout Vestas, the government is still largely on the side of renewable energy, with around 6.4% of the country’s power currently coming from wind.

There are certainly shadows on the horizon for Vestas, and the earnings results this week have definitely added to a negative outlook. However along with the shadows there is also hope. The hit the company was set to take because of the tax credit expiry may not now come about, and although undoubtedly facing an increasingly austere world, there is still a genuine public appetite for green energy sources. The lending data certainly suggests the market seems to making bets against Vestas, but as we all know, the market has been wrong many times before.

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